What is a Fraud Audit?

A fraud audit is a detailed examination of the financial records of a business, with the intent of finding instances of fraud. This procedure is more detailed than a normal audit, since some types of fraud involve such small amounts of money and other assets that they might fall below the standard materiality threshold. The task of the auditor is to gather evidence regarding a fraud, which may also result in acting as an expert witness during subsequent legal proceedings.

Characteristics of a Fraud Audit

The key characteristics of a fraud audit are as follows:

Objective. The primary purpose of a fraud audit is to identify fraudulent activities, such as embezzlement, financial misstatements, or asset misappropriation, rather than simply ensuring compliance with accounting standards.
Tailored procedures. Auditors use specialized techniques and procedures, such as forensic analysis, surprise cash counts, detailed reconciliations, and review of unusual journal entries, to uncover potential fraud.
Focus on red flags. The audit emphasizes identifying "red flags," such as unusual transactions, missing documentation, irregular financial trends, or conflicts of interest, which may indicate fraudulent behavior.
Use of forensic techniques. Fraud audits often involve forensic accounting methods, including data analysis, interviews with employees, tracing of transactions, and electronic evidence examination.
In-depth transactional review. The audit focuses on specific transactions or accounts that appear suspicious or are more susceptible to fraud, such as cash, accounts receivable, or expense reimbursements.
Confidentiality. Due to the sensitive nature of fraud audits, confidentiality is paramount. Auditors must conduct their work discreetly to avoid tipping off potential perpetrators.
Legal considerations. Fraud audits are often carried out in consultation with legal counsel and may involve gathering evidence that could be used in legal proceedings or to comply with regulatory requirements.
Specialized expertise. Fraud audits require specialized knowledge and skills in forensic accounting, fraud investigation techniques, and legal frameworks.
Documentation of findings. All findings, evidence, and procedures are thoroughly documented to support any legal or disciplinary action and to provide a clear audit trail.
Recommendations for prevention. After detecting fraud, auditors typically provide recommendations to improve controls, strengthen policies, and mitigate future fraud risks.
Collaboration with external experts. In complex cases, fraud auditors may work alongside external forensic experts, IT specialists, or law enforcement to gather and analyze evidence.

Audit vs. Fraud Audit

An audit is the examination of an entity's accounting records, as well as the physical inspection of its assets. If performed by a certified public accountant (CPA), the CPA can express an opinion on the fairness of the entity's financial statements. This differs significantly from a fraud audit, which is actually a consulting service, since the outcome does not involve giving an opinion on a client's financial statements. A fraud audit includes a higher proportion of interviews than a normal audit, since the auditors are also searching for clues from employees who might have noted behavior that is indicative of fraud.